This week the Supreme Court handed down its long awaited decision in the case of Ransom v. FIA Card Services N.A. which dealt with the expense allowance a bankrupt individual can claim on the means test for ownership of a vehicle.
The means test came into the law in 2005 and applies a formula to determine, if an individual has monthly disposable income, which is high enough to enable him or to pay back part of his or her unsecured debt. Basically the means test takes the debtor’s average income for the last six months, and then subtracts out allowances for various expenses. Most of the allowances such as food, clothing, utilities and transportation are standard amounts used by all debtors. Some of the allowances however, such as taxes, medical, and child support are based on the debtor’s actual expenses.
If the means test shows the debtor has enough disposable income the law requires him or her to file a Chapter 13 Bankruptcy in which the individual will make monthly payments for five years toward the debts. If the means test shows the income is not high enough the debtor may file a Chapter 7 bankruptcy and receive a discharge in about three months. The means test is also important when the individual files a Chapter 13, because the courts will look to the means test to calculate how much the debtor’s plan must pay toward his or her unsecured debts.
The means test includes a vehicle ownership expense for up to two vehicles owned by a household. It also includes a vehicle operating expense. The ownership allowance varies by locality and debtors living in Northern Illinois can currently claim an allowance for $496 for each car every month. In the five years since Congress enacted the means test, the courts have split on whether every individual owning a car may claim the car allowance or whether it is only available to debtors making car payments. The question can often make or break a bankruptcy plan, since at $496 a month the amount the debtor will have to pay over the life of his Chapter 13 plan will come to $29,760.
On January 11, 2011 with Justice Kagan rendering her first opinion, the Supreme Court decided in the case of , Ransom v. FIA Card Services N.A, that the ownership allowance is only available to debtors making loan or lease payments on the car. The decision now becomes the law of the land.
Friday, January 14, 2011
Thursday, December 30, 2010
Illinois Employee Credit Privacy Act
In 2010 the Illinois legislature passed the Employee Credit Privacy Act to protect employees from losing job opportunities based on negative credit reports. The law takes affect on January 1, 2011. The new law forbids an employer or a potential employer from discriminating against a person based on their credit history, and prohibits the use of a person's credit report or credit history as a basis for employment, discharge, or compensation.
The federal bankruptcy law has long forbidden an employer to discriminate against anyone in the job market who has filed bankruptcy, and it makes sense for the states to extend this coverage to credit problems, that are not severe enough to require bankruptcy.
The legislators have included a provision of the law which I believe will make it far more effective. Instead of merely telling employers that they cannot use the credit history in making their decisions; they have also included prohibitions against an employer or a potential employer inquiring about an individual’s credit history or obtaining a credit report on an employee or a potential employee.
As a bankruptcy lawyer I have encountered many individuals, who are worried about losing their jobs, when they file bankruptcy. I always point out that this conduct by their employer would be a violation of the bankruptcy law, but while this offers some comfort it does not totally eliminate the fear that an employer might just invent another official reason , when they are really firing someone for going bankrupt. Thus I believe making it illegal for the employer to even view the credit report adds a lot to the level of protection.
Unfortunately, the legislation blunted the protection in some other cases. Public employers, insurers, financial institutions and debt collectors are exempt from the provisions of the act. Also, an employer might be able to avoid the prohibition by claiming that credit history related to a bona fide job requirement.
The federal bankruptcy law has long forbidden an employer to discriminate against anyone in the job market who has filed bankruptcy, and it makes sense for the states to extend this coverage to credit problems, that are not severe enough to require bankruptcy.
The legislators have included a provision of the law which I believe will make it far more effective. Instead of merely telling employers that they cannot use the credit history in making their decisions; they have also included prohibitions against an employer or a potential employer inquiring about an individual’s credit history or obtaining a credit report on an employee or a potential employee.
As a bankruptcy lawyer I have encountered many individuals, who are worried about losing their jobs, when they file bankruptcy. I always point out that this conduct by their employer would be a violation of the bankruptcy law, but while this offers some comfort it does not totally eliminate the fear that an employer might just invent another official reason , when they are really firing someone for going bankrupt. Thus I believe making it illegal for the employer to even view the credit report adds a lot to the level of protection.
Unfortunately, the legislation blunted the protection in some other cases. Public employers, insurers, financial institutions and debt collectors are exempt from the provisions of the act. Also, an employer might be able to avoid the prohibition by claiming that credit history related to a bona fide job requirement.
Sunday, December 26, 2010
Loans From Qualified Retirement Plans
Some individuals suffering financial problems attempt to avoid having to file a Chapter 7 bankruptcy or a Chapter 13 bankruptcy by withdrawing funds from a qualified retirement plan to pay their debts However, this strategy is seldom a good idea. In the first place qualified plans are designed to provide for a worker’s retirement, and withdrawing the funds to apply to current problems can lead to devastating long term consequences by leaving the workers with little means of support during the final years of their lives.
In addition qualified plans contain tax incentives to encourage people to use these plans and save for their retirement, and the flip side of these incentives is that withdrawing the funds early has a heavy tax cost that can add to a person’s financial problems.
Finally, creditors cannot levy against qualified plans to collect on judgements. Someone, who is struggling to pay his or her debts should not give up this protection, and it is never a happy situation when someone deletes their 401k trying to pay off debts and ends up filing bankruptcy anyway.
As an alternative to withdrawing from a retirement plan, some plans allow the participant to take out a loan. Qualified loans from 401k plans or other qualified retirement or profit sharing plans must be repaid in five years, and the employee must repay the loan in basically level payments made at least quarterly. The interest portion of these payments are not deductible for tax purposes. The loans cannot exceed the lesser of $50,000.00 or the employees nonforfeitable balance in the plan.
Borrowing from a qualified plan is not an ideal solution to a financial crisis, since these loans can often prove difficult to repay; and the law treats a failure to repay as a taxable distribution from the plan. However, borrowing is better than a total withdrawal, because you still have the possibility of being able to repay the loan, and even if you fail to repay the entire amount you will receive the benefits of a qualified plan on the portion you do manage to repay.
In addition qualified plans contain tax incentives to encourage people to use these plans and save for their retirement, and the flip side of these incentives is that withdrawing the funds early has a heavy tax cost that can add to a person’s financial problems.
Finally, creditors cannot levy against qualified plans to collect on judgements. Someone, who is struggling to pay his or her debts should not give up this protection, and it is never a happy situation when someone deletes their 401k trying to pay off debts and ends up filing bankruptcy anyway.
As an alternative to withdrawing from a retirement plan, some plans allow the participant to take out a loan. Qualified loans from 401k plans or other qualified retirement or profit sharing plans must be repaid in five years, and the employee must repay the loan in basically level payments made at least quarterly. The interest portion of these payments are not deductible for tax purposes. The loans cannot exceed the lesser of $50,000.00 or the employees nonforfeitable balance in the plan.
Borrowing from a qualified plan is not an ideal solution to a financial crisis, since these loans can often prove difficult to repay; and the law treats a failure to repay as a taxable distribution from the plan. However, borrowing is better than a total withdrawal, because you still have the possibility of being able to repay the loan, and even if you fail to repay the entire amount you will receive the benefits of a qualified plan on the portion you do manage to repay.
Monday, December 6, 2010
Tax Deduction for Student Loan Interest
Individuals who have incurred large debts in th process of acquiring an education do not always achieve the success they had hoped for with their degrees, and thus the bankrupty law can create quite a burden by denying a discharge of student loan debts in most cases.
This does seem fair in many ways, since these debtors incurred the student loans in an effort to improve themselves, which public policy should encourage. Yet unlike a person, who cannot keep track of his credit card debt, an individual, who studied hard in college or professional school and learned after he graduated that the opportunities for someone with the credentials he has worked so long to acquire just do not exist, can generally not receive relief in bankruptcy.
One break the law does give to people having student loans though comes when they file their tax returns. Individual taxpayers may deduct up to $2,500 of interest a year on student loans, and this is an above the line deduction, which means the former student will receive the benefit, even if he or she does not itemize deductions.
The deduction phases our for individuals having modified adjusted gross incomes of between $60,000 and $75,000 a year, or for couples filing joint returns who have between $120,000 and $150,000 of modified adjusted gross income. Modified adjusted gross income for this purpose means adjusted gross income with a couple of modifications that the law creates for purposes of figuring this deduction.
To qualify for the deduction for interest on student loans, the taxpayer must be paying interest on a loan for qualified higher education expenses incurred by himself or his spouse, when the recipient was at least a half time student. Qualified higher education expenses include, room and board and related expenses involved in attending an institution of higher education as well as tuition and fees.
This does seem fair in many ways, since these debtors incurred the student loans in an effort to improve themselves, which public policy should encourage. Yet unlike a person, who cannot keep track of his credit card debt, an individual, who studied hard in college or professional school and learned after he graduated that the opportunities for someone with the credentials he has worked so long to acquire just do not exist, can generally not receive relief in bankruptcy.
One break the law does give to people having student loans though comes when they file their tax returns. Individual taxpayers may deduct up to $2,500 of interest a year on student loans, and this is an above the line deduction, which means the former student will receive the benefit, even if he or she does not itemize deductions.
The deduction phases our for individuals having modified adjusted gross incomes of between $60,000 and $75,000 a year, or for couples filing joint returns who have between $120,000 and $150,000 of modified adjusted gross income. Modified adjusted gross income for this purpose means adjusted gross income with a couple of modifications that the law creates for purposes of figuring this deduction.
To qualify for the deduction for interest on student loans, the taxpayer must be paying interest on a loan for qualified higher education expenses incurred by himself or his spouse, when the recipient was at least a half time student. Qualified higher education expenses include, room and board and related expenses involved in attending an institution of higher education as well as tuition and fees.
Monday, November 22, 2010
What is the Means Test?
The means test is a formula created by Congress and included in the 2005 revision to the bankruptcy law. The test is the centerpiece of the bankruptcy overhaul law and is used to calculate whether an individual filing bankruptcy has any income available to pay toward his unsecured debts. The means test is first used to determine, if an individual has enough income available to make payments on his unsecured debts, and if his income exceeds a certain amount the debtor will not be allowed to file a Chapter 7 bankruptcy, in which the court would have granted him a discharge without first requiring him to make monthly payments toward his debt. If the income is above the thresh hold for a Chapter 7 the law will only allow him to file a Chapter 13 bankruptcy in which he makes monthly payments for a five year period.
If an individual must file a Chapter 13 the means test will also be used to determine how much his plan payments will have to include to cover unsecured debts. Needless to say for a bankruptcy lawyer a thorough understanding of the means test is now a necessity.
The means test starts by taking the debtors average monthly income for the six months before filing the petition and subtracting out what the bankruptcy law allows as deductions. For most expenses such as food, clothing, personal care, transportation, utilities etc the debtor receives a standard allowance for the expenses regardless of his or her actual expenses. For certain items however such as taxes, mortgage and car payments, medical expenditures, health insurance, day care, child support and charitable contributions up to 15% of one’s income, the debtor may deduct his actual expense.
The income less the allowable expenses produces what is called current monthly income, and unless he qualifies for a Chapter 7 an individual debtor will have to pay at least 60 times the current monthly income to his unsecured creditors.
If an individual must file a Chapter 13 the means test will also be used to determine how much his plan payments will have to include to cover unsecured debts. Needless to say for a bankruptcy lawyer a thorough understanding of the means test is now a necessity.
The means test starts by taking the debtors average monthly income for the six months before filing the petition and subtracting out what the bankruptcy law allows as deductions. For most expenses such as food, clothing, personal care, transportation, utilities etc the debtor receives a standard allowance for the expenses regardless of his or her actual expenses. For certain items however such as taxes, mortgage and car payments, medical expenditures, health insurance, day care, child support and charitable contributions up to 15% of one’s income, the debtor may deduct his actual expense.
The income less the allowable expenses produces what is called current monthly income, and unless he qualifies for a Chapter 7 an individual debtor will have to pay at least 60 times the current monthly income to his unsecured creditors.
Sunday, November 14, 2010
Bankruptcy and Credit Reports
A person’s credit rating credit rating has become very important in modern society, and in the twenty-first century credit rating agencies have perhaps become the equivalent of the ever present Big Brother, who kept the entire population in a state of fear, in George Orwell’s 1984. A low credit score will increase the rate of
interest a consumer pays on a loan, or in some cases prevent a person from getting a loan altogether. Insurance companies review credit ratings as part of their underwriting process,employers check credit scores when they are hiring a new employee and sometimes before they approve a current employee's promotion, and landlords will often refuse to rent an apartment to an individual who has credit problems.
Thus it is hardly surprising that one of the questions many people ask, when they consult a bankruptcy lawyers, is how will a bankruptcy affect my credit score. The simple answer is that bankruptcy shows as a negative item on your credit report, and it will stay on your credit report for ten years.
However, as a practical matter filing bankruptcy will usually improve an individual’s credit score. This is because in most cases by the time an individual files a bankruptcy he or she usually already has a number of negative negative items on his credit score, such as missed mortgage payments, failure to pay the minimum charge charge on a credit card, judgements, garnishments, etc. When an individual files a chapter 7 or chapter 13 bankruptcy this goes on the credit report, but all these other items disappear from the report, and if she pays her bills going forward her credit will start to improve.
If an individual does not file bankruptcy on the other hand the late payments, judgments and garnishments will stay on his credit report until he catches up on these debts, and the reason most people consider filing bankruptcy is because they realize they are unlikely to be able to pay off these items in the foreseeable future.
interest a consumer pays on a loan, or in some cases prevent a person from getting a loan altogether. Insurance companies review credit ratings as part of their underwriting process,employers check credit scores when they are hiring a new employee and sometimes before they approve a current employee's promotion, and landlords will often refuse to rent an apartment to an individual who has credit problems.
Thus it is hardly surprising that one of the questions many people ask, when they consult a bankruptcy lawyers, is how will a bankruptcy affect my credit score. The simple answer is that bankruptcy shows as a negative item on your credit report, and it will stay on your credit report for ten years.
However, as a practical matter filing bankruptcy will usually improve an individual’s credit score. This is because in most cases by the time an individual files a bankruptcy he or she usually already has a number of negative negative items on his credit score, such as missed mortgage payments, failure to pay the minimum charge charge on a credit card, judgements, garnishments, etc. When an individual files a chapter 7 or chapter 13 bankruptcy this goes on the credit report, but all these other items disappear from the report, and if she pays her bills going forward her credit will start to improve.
If an individual does not file bankruptcy on the other hand the late payments, judgments and garnishments will stay on his credit report until he catches up on these debts, and the reason most people consider filing bankruptcy is because they realize they are unlikely to be able to pay off these items in the foreseeable future.
Saturday, November 13, 2010
Can A Chapter 13 Bankruptcy Plan Be Amended
Individuals entering a Chapter 13 bankruptcy generally are committing to make payments out of their disposable income for a three to five year period, and as they frequently point out to their bankruptcy lawyers a lot can change in this period of time. They could lose their job, they could have medical problems or give birth to additional children, or they could get divorced and have to support two households instead of one.
If such traumatic events occur many debtors will be unable to make their Chapter 13 plan payments, and as a bankruptcy lawyer I can see why they become nervous about making this long term commitment.
The law however offers some relief in these situations. A Chapter 13 bankruptcy plan can be amended after the court confirms the plan, if a substantial change of financial circumstances has occurred. The debtor may petition the court to amend the plan, and in many cases the court will grant lower payments. Or if circumstances grow so bleak that the debtor can no longer afford to make any payments, he or she can convert the Chapter 13 bankruptcy to a Chapter 7 bankruptcy.
Unfortunately, when the payments go down it may become impossible to meet some of the debtor’s goals under the plan. In many cases the reason for choosing a Chapter 13 over a Chapter 7 is because the Chapter 13 allows a homeowner to stop a foreclosure by paying back the mortgage arrearage over a five year period. This requires the plan to pay back the entire amount of the shortage though, and while an individual will still receive his discharge after amending the plan, if there is not enough money remaining to pay-off the mortgage delinquency the foreclosure may proceed.
A similar situation can occur when the debtor was counting on paying off non-dischargeable tax debts. A Chapter 13 must pay off 100% of the non dischargeable portion of the tax liability, and while a person may be able to obtain a Chapter 7 discharge after a drop in income, if he converts he will still have to deal with the IRS after the bankruptcy is finished.
If such traumatic events occur many debtors will be unable to make their Chapter 13 plan payments, and as a bankruptcy lawyer I can see why they become nervous about making this long term commitment.
The law however offers some relief in these situations. A Chapter 13 bankruptcy plan can be amended after the court confirms the plan, if a substantial change of financial circumstances has occurred. The debtor may petition the court to amend the plan, and in many cases the court will grant lower payments. Or if circumstances grow so bleak that the debtor can no longer afford to make any payments, he or she can convert the Chapter 13 bankruptcy to a Chapter 7 bankruptcy.
Unfortunately, when the payments go down it may become impossible to meet some of the debtor’s goals under the plan. In many cases the reason for choosing a Chapter 13 over a Chapter 7 is because the Chapter 13 allows a homeowner to stop a foreclosure by paying back the mortgage arrearage over a five year period. This requires the plan to pay back the entire amount of the shortage though, and while an individual will still receive his discharge after amending the plan, if there is not enough money remaining to pay-off the mortgage delinquency the foreclosure may proceed.
A similar situation can occur when the debtor was counting on paying off non-dischargeable tax debts. A Chapter 13 must pay off 100% of the non dischargeable portion of the tax liability, and while a person may be able to obtain a Chapter 7 discharge after a drop in income, if he converts he will still have to deal with the IRS after the bankruptcy is finished.
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